A new model of central-bank intervention: an
Alexei Deviatov and Neil Wallacey
February 25, 2008
Optimal monetary policy is studied, by way of a numerical example,
in a model with (i) heterogeneity in the degree to which di¤erent people
are monitored (have publicly known histories); (ii) idiosyncratic shocks
that give rise to heterogeneity in earning and spending realizations;
and (iii) central-bank intervention in a marketin claims or credit in
which the participants are those who are heavily monitored. The result
serves as a counterexample to two widely held views: optimal policy is
unrelated to what makes money important and there are simple and
well-known principles to guide monetary policy.
Keywords: monetary policy, search, central-bank intervention
JEL codes: E52, E58
[For the Bank of England in 1805] knowing the direction of the wind
was [important] ... If ...
from the east, ships would soon be sailing
up the Thames to unload goods in London. The Bank would need to
supply lots of money..... If a westerly was blowing, the Bank would mop
up any excess money..., thereby avoiding ination. The 19th century
Bank knew the importance of money ..., Mervyn King, the current
governor, told the FT in an interview .... But money matters were
much simpler in 1805 than today (Winds of change by Chris Giles,
Financial Times, (FT), May 14, 2007).
New Economic School. Address: 47 Nahimovskii Ave., room 1721, Moscow, 117418,
Russian Federation. E-mail: firstname.lastname@example.org.
yPennsylvania State University. Address: 612 Kern Graduate building, University
Park, PA 16802, United States of America. E-mail: email@example.com.
Monetary economics is split into two main strands. One consists of dynamic
stochastic general equilibrium (DSGE) models, calibrated or estimated, that
claim to provide guidance to monetary policy. It rests largely on various for-
mulations of sticky prices (menu costs) and its implications do not depend
on the role of money. The other strand, a good deal of which is i